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Warren Buffett's Sneaky Berkshire Buyback Math

Written by: Antoine Gara12/12/12 - 10:31 AM EST

Tickers in this article:
BRK.A BRK.B IBM JPM WFC

NEW YORK (TheStreet) -- Berkshire Hathaway(BRK.A) has decided to repurchase over $1 billion of shares, indicating that the 'Oracle of Omaha' may have changed the math behind rules that govern share buybacks.

Berkshire Hathaway said in a statement Wednesday that it is buying 9,200 of its Class A shares from what it calls "estate of a long-time shareholder" because the firm's shares sit below 120% of the company's book value per share. According to a press release announcing the repurchase, Berkshire is buying shares back at $131,000.00, or roughly $1.2 billion.

But 120% of book value figure appears to be an increase from levels previously stated in Berkshire's 2011 annual letter for a buyback bogey.

In February, Buffett said he will consider buying back Berkshire shares so long as the company's stock trades at less than 110% of its book value. Tuesday's repurchase indicate an increase in Berkshire's rules and might reflect the notion that valuation multiples of the legendary value investor uses are on the rise.

Book value is the Buffett's preferred metric for valuing Berkshire Hathaway, and the 'Oracle of Omaha' stresses it over the company's stock performance relative to the S&P 500.

As of the third quarter, Berkshire Class A shares stood at a book value of $111.718.31 a share. Buybacks priced at $131,000 put repurchases at roughly 117% of Berkshire's book value.

"Berkshire Hathaway has purchased 9,200 of its Class A shares at $131,000 per share from the estate of a long-time shareholder. The Board of Directors authorized this purchase coincident with raising the price limit for repurchases to 120% of book value," the press release states. "Berkshire may purchase additional shares in the market or through direct offerings at no more than 120% of book value."

"The value of our float is one reason- a huge reason- why we believe Berkshire's intrinsic business value substantially exceeds book value," Buffett wrote in his annual letter that was released on Berkshire's website in February.

Buffett limits repurchases a fixed ratio relative to book value because he sees buybacks at higher prices as destroying shareholder value. Previously, Buffett has criticized companies such as JPMorgan(JPM) for expensive stock repurchases.

"Continuing shareholders are hurt unless shares are purchased below intrinsic value. The first law of capital allocation -- whether the money is slated for acquisitions or share repurchases -- is that what is smart at one price is dumb at another," wrote Buffett in his February letter.